Bank charges

Seeing red

"They made my heart beat far faster / with their talk of the banking charter" is unusual fare for the pop charts, but I Fought the Lloyds is at number 25 this week, up there with Rihanna and the Sugababes. Perhaps lacking some of the verve of the Clash version (understandable when dealing with issues that might come under the unfair terms in consumer contracts regulations), the song still mounts a spirited attack on unauthorised overdraft charges. Musicians are not alone in seeing red about the cost of going into the red: about 330,000 customers have got refunds, and tomorrow the Office of Fair Trading (OFT) begins a high court test case against the big banks.

At the heart of this argument is a simple question: are unauthorised overdrafts a special service, akin to issuing travellers' cheques, or is the facility really just a penalty charge? The OFT takes the latter view, and wants to regulate how much banks sting customers who go overdrawn without permission. At the moment charges are dictated by the industry - and can easily top £30 a time, a figure far above what it costs to provide an overdraft at short notice. Given that regulators have already spent months examining the issue, and that banks have settled out of court so many times, the OFT must be in a strong position to win.

To count as special services, unauthorised overdrafts would have to be applied for (as with foreign exchange), and consumers asked whether they want the transaction. But no such formality applies on either side: one in five customers crash into the red, and banks usually send no letters, preferring to stick the bad tidings on the monthly statement. Bankers argue that high overdraft charges help subsidise free banking for more prudent souls. They note that British customers pay less for their current accounts than those in almost any other nation. That is undoubtedly a good thing, but not at the expense of fairness for a large minority and transparency for all.

Customers at high-street banks used to be rather docile creatures, but encouraged by consumer-action websites, they are turning feisty. This test case was only launched once banks had paid out so much money that they resigned themselves to a high court hearing. Next the OFT will publish its study of current accounts, which should lay bare just how "so-called free banking" (a rare and welcome bit of regulatory irony) is propped up by often unclear and unreasonably high costs on everything from using plastic on holiday to not processing transactions quickly enough. That formerly deferential relationship between bank and consumer is bound to become more adversarial. As the song goes, "I've noticed HSBC are getting a little bit sarky."